The stock market faces a doubly poisonous cocktail: signs of slowing economic growth while central banks attempt to rein in inflation that, unlike the pandemic, hasn’t subsided meaningfully.
The pincer squeeze from those twin pressures came into sharp focus this past week after a much worse than expected reading on retail inflation from August, which was followed by
The big shipper’s cautionary signal followed similar weakness in another economically sensitive sector, as indicated by a steep drop in the
Materials Select Sector SPDR
exchange-traded fund (XLB). (See the Trader column for the gory details.)
As equities slid on the FedEx news Friday, the bond market was the proverbial dog that didn’t bark. Unlike during previous stock swoons, Treasury securities failed to catch a bid from investors seeking a haven in the selling storm. Bonds evidently are braced for the impact of another big, 75-basis-point interest-rate increase at the conclusion of the Federal Open Market Committee’s two-day meeting Wednesday. (A basis point is 1/100th of a percentage point.)
To be sure, Treasury yields were sharply higher on the week, having jumped following Tuesday’s consumer-price-index report. In particular, the key two-year note’s yield was up 30 basis points, to 3.871% on Friday, its highest level since Oct. 31, 2007.
As expected, the steep decline in retail gasoline prices tamped down the overall monthly CPI headline gain to 0.1%. But “core CPI,” which excludes food and energy costs, rose at a 0.6% clip—twice the forecast increase.
The unexpected worsening in price trends prompted some calls for a super-sized 100-basis-point hike in the federal-funds target rate this coming week. By Friday, the fed-funds futures market was putting an 82% probability of a 75-basis-point move,according to the CME FedWatch website, in line with the prediction in a Wall Street Journal story earlier in the week. That still left an 18% chance of a full percentage-point jump.
Notwithstanding the bigger-than-expected CPI rise, some complaints were heard that the Federal Reserve is overdoing the tightening. According to the bleating by some critics—mainly those who had previously feasted on cheap money from the central bank—the central bank is reacting to a lagging indicator by paying heed to inflation.
Pushback to that notion comes from John Ryding and Conrad DeQuadros, economic advisors at Brean Capital, who argued last year that inflation wouldn’t be transitory, as the Fed then was insisting. They contend that monetary policy is still far from restrictive, even thoughinflation is becoming more broad-based.
If the Fed raises the fed-funds target by 75 basis points this coming week, the key policy rate would remain lower in real terms than at any time from 1954 to 2021, they write in a client note. That reflects the wide gap between the 8.3% yearly CPI rise and the current 2.25% to 2.5% fed-funds rate, and a likely new range of 3% to 3.25% after this week’s likely rate increase. In other words, we still have money for nothing and—with apologies to Dire Straits—bips for free (to use the market’s slang for basis points).
Since what the Federal Open Market Committee will actually do is nearly certain, the main focus will be on its new Summary of Economic Projections and, as usual, Federal Reserve Chairman Jerome Powell’s postmeeting press conference.
This confab will produce the first new set of economic projections since the June FOMC meeting, which continued to portray an optimistic outlook.
In that report, inflation was seen coming down toward the 2% neighborhood—the Fed’s long-term goal for the personal consumption deflator—while unemployment was expected to only edge up from the low 3.7% most recently tallied, and economic growth was projected to come in around or slightly below its long-term trend. Back in the 1980s, such benign forecasts were said to be produced by a government economist named Rosy Scenario.
The FOMC’s expectation (don’t call it a forecast) for fed funds might be taken more seriously, given that the target rate is under the panel’s control. The projection for the end of this year is certain to be raised from the 3.4% in June.
As of Friday, December fed-funds futures were split between a 4%-to-4.25% and a 4.25%-to-4.5% year-end range. That would imply another 75-basis-point hike at the Nov. 1-2 FOMC gathering, followed by either a 25- or 50-point hike in December.
Perhaps more telling will be projections for 2023 and beyond. The futures market no longer looks for the Fed to cut rates next year, an expectation underlined by the bond market’s lack of reaction to the FedEx earnings news. Futures currently point to a peak range of 4.25% to 4.5%, to be hit by February and to linger through July. That’s about double the current target range.
In a widely read LinkedIn post this past week, Bridgewater Associates’ founder Ray Dalio wrote that a 4.5% fed-funds rate could mean a 20% drop in equity prices. But to achieve Jerome Powell & Co.’s anti-inflation goal,
Deutsche Bank
economists suggest, a rate near 5% might be needed.
None of which sounds auspicious for the bulls.
Write to Randall W. Forsyth at [email protected]
Bulls Get Scorched by FedEx. Don’t Expect the Fed to Help.
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FedEx’s disappointing earnings and unexpectedly weak guidance were key factors in this past week’s stock market swoon.
David Paul Morris/Bloomberg
The stock market faces a doubly poisonous cocktail: signs of slowing economic growth while central banks attempt to rein in inflation that, unlike the pandemic, hasn’t subsided meaningfully.
The pincer squeeze from those twin pressures came into sharp focus this past week after a much worse than expected reading on retail inflation from August, which was followed by
FedEx
(ticker: FDX) stunning the financial world ahead of Friday’s session with disappointing results and withdrawing its earnings guidance over signs of slowing global business.
The big shipper’s cautionary signal followed similar weakness in another economically sensitive sector, as indicated by a steep drop in the
Materials Select Sector SPDR
exchange-traded fund (XLB). (See the Trader column for the gory details.)
As equities slid on the FedEx news Friday, the bond market was the proverbial dog that didn’t bark. Unlike during previous stock swoons, Treasury securities failed to catch a bid from investors seeking a haven in the selling storm. Bonds evidently are braced for the impact of another big, 75-basis-point interest-rate increase at the conclusion of the Federal Open Market Committee’s two-day meeting Wednesday. (A basis point is 1/100th of a percentage point.)
To be sure, Treasury yields were sharply higher on the week, having jumped following Tuesday’s consumer-price-index report. In particular, the key two-year note’s yield was up 30 basis points, to 3.871% on Friday, its highest level since Oct. 31, 2007.
As expected, the steep decline in retail gasoline prices tamped down the overall monthly CPI headline gain to 0.1%. But “core CPI,” which excludes food and energy costs, rose at a 0.6% clip—twice the forecast increase.
The unexpected worsening in price trends prompted some calls for a super-sized 100-basis-point hike in the federal-funds target rate this coming week. By Friday, the fed-funds futures market was putting an 82% probability of a 75-basis-point move,according to the CME FedWatch website, in line with the prediction in a Wall Street Journal story earlier in the week. That still left an 18% chance of a full percentage-point jump.
Notwithstanding the bigger-than-expected CPI rise, some complaints were heard that the Federal Reserve is overdoing the tightening. According to the bleating by some critics—mainly those who had previously feasted on cheap money from the central bank—the central bank is reacting to a lagging indicator by paying heed to inflation.
Pushback to that notion comes from John Ryding and Conrad DeQuadros, economic advisors at Brean Capital, who argued last year that inflation wouldn’t be transitory, as the Fed then was insisting. They contend that monetary policy is still far from restrictive, even thoughinflation is becoming more broad-based.
If the Fed raises the fed-funds target by 75 basis points this coming week, the key policy rate would remain lower in real terms than at any time from 1954 to 2021, they write in a client note. That reflects the wide gap between the 8.3% yearly CPI rise and the current 2.25% to 2.5% fed-funds rate, and a likely new range of 3% to 3.25% after this week’s likely rate increase. In other words, we still have money for nothing and—with apologies to Dire Straits—bips for free (to use the market’s slang for basis points).
Since what the Federal Open Market Committee will actually do is nearly certain, the main focus will be on its new Summary of Economic Projections and, as usual, Federal Reserve Chairman Jerome Powell’s postmeeting press conference.
This confab will produce the first new set of economic projections since the June FOMC meeting, which continued to portray an optimistic outlook.
In that report, inflation was seen coming down toward the 2% neighborhood—the Fed’s long-term goal for the personal consumption deflator—while unemployment was expected to only edge up from the low 3.7% most recently tallied, and economic growth was projected to come in around or slightly below its long-term trend. Back in the 1980s, such benign forecasts were said to be produced by a government economist named Rosy Scenario.
The FOMC’s expectation (don’t call it a forecast) for fed funds might be taken more seriously, given that the target rate is under the panel’s control. The projection for the end of this year is certain to be raised from the 3.4% in June.
As of Friday, December fed-funds futures were split between a 4%-to-4.25% and a 4.25%-to-4.5% year-end range. That would imply another 75-basis-point hike at the Nov. 1-2 FOMC gathering, followed by either a 25- or 50-point hike in December.
Perhaps more telling will be projections for 2023 and beyond. The futures market no longer looks for the Fed to cut rates next year, an expectation underlined by the bond market’s lack of reaction to the FedEx earnings news. Futures currently point to a peak range of 4.25% to 4.5%, to be hit by February and to linger through July. That’s about double the current target range.
In a widely read LinkedIn post this past week, Bridgewater Associates’ founder Ray Dalio wrote that a 4.5% fed-funds rate could mean a 20% drop in equity prices. But to achieve Jerome Powell & Co.’s anti-inflation goal,
Deutsche Bank
economists suggest, a rate near 5% might be needed.
None of which sounds auspicious for the bulls.
Write to Randall W. Forsyth at [email protected]
Source: https://www.barrons.com/articles/bulls-get-scorched-by-fedex-dont-expect-the-fed-to-help-51663377117?siteid=yhoof2&yptr=yahoo